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Equilibrium Unemployment and Credit Market Imperfections: The Critical Role of Labour Mobility

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  • Erkki Koskela
  • Rune Stenbacka
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    Abstract

    We investigate the interaction between labour and credit market imperfections for the determination of equilibrium unemployment within the framework of the "right-tomanage" approach. Our analysis highlights the critical role of labour mobility for the evaluation of the employment implications of intensified credit market competition. Without labour mobility increased bargaining power of banks will have adverse employment effects. However, with a labour force mobile across industries this relationship is frequently reversed if firms adopt profit sharing schemes. If employment at a fixed wage complements unemployment benefits to constitute the trade union's relevant outside option, intensified credit market competition will increase equilibrium unemployment. This relationship is shown to hold also for cases where the outside option incorporates profit sharing schemes as long as the labour market imperfections – measured by the relative bargaining power of the trade unions - are sufficiently strong.

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    File URL: http://www.cesifo-group.de/portal/page/portal/DocBase_Content/WP/WP-CESifo_Working_Papers/wp-cesifo-2002/wp-cesifo-2002-01/654.PDF
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    Bibliographic Info

    Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 654.

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    Date of creation: 2002
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    Handle: RePEc:ces:ceswps:_654

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    Related research

    Keywords: wage and loan bargaining; compensation systems; equilibrium unemployment; outside options.;

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    1. Oliver Hart, 2006. "Different approaches to bankruptcy," CESifo DICE Report, Ifo Institute for Economic Research at the University of Munich, vol. 4(1), pages 3-8, 04.
    2. Cahuc, P. & Dormont, B., 1992. "Profit-Sharing: Does It Increase Productivity and Employment? A Theoretical Model and Empirical Evidence of French Micro Data," Papiers d'Economie Mathématique et Applications 92.45, Université Panthéon-Sorbonne (Paris 1).
    3. Nickell, S. & Nicolitsas, D., 1995. "How Does Financial Pressure Affect Firms," Economics Series Working Papers 99170, University of Oxford, Department of Economics.
    4. Simon P. Anderson & Michael Devereux, 1989. "Profit-Sharing and Optimal Labour Contracts," Canadian Journal of Economics, Canadian Economics Association, vol. 22(2), pages 425-33, May.
    5. Bronars, Stephen G & Deere, Donald R, 1991. "The Threat of Unionization, the Use of Debt, and the Preservation of Shareholder Wealth," The Quarterly Journal of Economics, MIT Press, vol. 106(1), pages 231-54, February.
    6. Zsolt Becsi & Victor Li & Ping Wang, 2000. "Financial matchmakers in credit markets with heterogeneous borrowers," Working Paper 2000-14, Federal Reserve Bank of Atlanta.
    7. Nickell, S. & Layard, R., 1997. "Labour Market Institutions and Economic Performance," Papers 23, Centre for Economic Performance & Institute of Economics.
    8. repec:fth:bfdipa:12/2000 is not listed on IDEAS
    9. Jerger, Jurgen & Michaelis, Jochen, 1999. " Profit Sharing, Capital Formation and the NAIRU," Scandinavian Journal of Economics, Wiley Blackwell, vol. 101(2), pages 257-75, June.
    10. Bester, Helmut, 1995. "A bargaining model of financial intermediation," European Economic Review, Elsevier, vol. 39(2), pages 211-228, February.
    11. Holmlund, B., 1988. "Profit Sharing, Wage Bargaining, And Unemployment," Papers 1988l, Uppsala - Working Paper Series.
    12. Michael Funke & Wolf Maurer & Holger Strulik, 1998. "Capital Structure and Labour Demand: Investigations Using German Micro Data," Quantitative Macroeconomics Working Papers 19801, Hamburg University, Department of Economics.
    13. Koskela, Erkki & Stenbacka, Rune, 2000. "Agency Cost of Debt and Lending Market Competition: A Re-Examination," Research Discussion Papers 12/2000, Bank of Finland.
    14. Acemoglu, Daron, 2001. "Credit market imperfections and persistent unemployment," European Economic Review, Elsevier, vol. 45(4-6), pages 665-679, May.
    15. Dasgupta, Sudipto & Sengupta, Kunal, 1993. "Sunk Investment, Bargaining and Choice of Capital Structure," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 34(1), pages 203-20, February.
    16. Martin L. Weitzman, 1984. "The Simple Macroeconomics of Profit Sharing," Working papers 357, Massachusetts Institute of Technology (MIT), Department of Economics.
    17. Wasmer, Etienne & Weil, Philippe, 2002. "The Macroeconomics of Labour and Credit Market Imperfections," CEPR Discussion Papers 3334, C.E.P.R. Discussion Papers.
    18. Dalmazzo, Alberto, 1996. " Debt and Wage Negotiations: A Bankruptcy-Based Approach," Scandinavian Journal of Economics, Wiley Blackwell, vol. 98(3), pages 351-64.
    19. Koskela, Erkki & Stenbacka, Rune, 2000. "Is there a tradeoff between bank competition and financial fragility?," Journal of Banking & Finance, Elsevier, vol. 24(12), pages 1853-1873, December.
    20. Perotti, E.C. & Spier, K.E., 1991. "Capital Structure As A Bargaining Tool: The Role Of Leverage In Contract Renegociation," Harvard Institute of Economic Research Working Papers 1548, Harvard - Institute of Economic Research.
    21. Layard, Richard & Nickell, Stephen & Jackman, Richard, 2005. "Unemployment: Macroeconomic Performance and the Labour Market," OUP Catalogue, Oxford University Press, number 9780199279173, October.
    22. Weitzman, Martin L, 1987. "Steady State Unemployment under Profit Sharing," Economic Journal, Royal Economic Society, vol. 97(385), pages 86-105, March.
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    Cited by:
    1. Gatti, Donatella & Vaubourg, Anne-Gaël, 2009. "Unemployment and Finance: How Do Financial and Labour Market Factors Interact?," IZA Discussion Papers 4075, Institute for the Study of Labor (IZA).
    2. Donatella Gatti & Anne-Gael Vaubourg, 2010. "Credit and Unemployment: Do Institutions Matter?," CESifo Forum, Ifo Institute for Economic Research at the University of Munich, vol. 11(1), pages 37-43, 04.

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